How financial interest charges differ from interest charges on technical debt

Last updated on December 21st, 2017 at 01:48 pm

Second only to the term debt, the term interest is perhaps the most common financial term in the literature of technical debt. In the financial realm, interest charges are the cost of using money, usually expressed as a percentage rate per unit time.

Credit cards also have interest charges
Credit cards. Revolving, unsecured, charge accounts are perhaps the most familiar form of financial debt. They do have one thing in common with technical debt: with either one, it’s easy to get into debt over your head.

The notion of interest is deep in our culture. People understand it well, but the way they understand it corresponds to interest rates that are fixed, or at worst relatively slowly varying. This understanding creates a bias in the way we understand technical debt, in the sense that we perceive the elements of technical debt as imposing a cost that is a relatively stable fraction, per fiscal period, of the initial MPrin. This belief doesn’t correspond to the reality of technology-based systems, which are the targets of the technical debt metaphor. Formulating sound technical debt policy depends on understanding the nature of the difference between interest on financial debt and the metaphorical interest charges associated with technical debt.

There are two fundamental reasons why metaphorical interest charges on technical debt differ from the interest on financial debt.
  • Metaphorical interest charges depend strongly on whether and how the people of the enterprise interact with the assets bearing the technical debt.
  • The metaphorical interest charges on technical debt include the value of opportunities lost to the enterprise (opportunity cost) due to depressed productivity and reduced organizational agility.

Neither of these factors has a direct analog in the financial context. In finance, the interest charges depend solely on a mathematical formula based on the interest rate and the size of the principal.

In the next few posts we’ll explore the properties of metaphorical interest charges. This investigation will help clarify how they differ from financial interest charges, and how that difference contributes to difficulties in managing technical debt.

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